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Baidu Inc. (ADR) Has Competition in Online-to-Offline, but I'm Not Concerned

Baidu is smart to target this area of the market.

Baidu(NASDAQ:BIDU)made its name (and created billions of dollars in shareholder value) mostly in online search. If CEO Robin Li has his way, the next major avenue for growth is in online-to-offline, or O2O, transactions. These are consumer interactions that begin online and culminate in the physical world. Some examples are buying a movie ticket on one's smartphone and then going to the theater to view the film, or buying a coupon from a daily deals site and then turning it in for dinner at a new restaurant.

Baidu has involved itself in these spaces and others, such as laundry and food delivery. Li views this market as significantly larger than that of online search, and it was only a matter of time before competitors began to stake their claims.

Who's getting involved?According to VentureBeat, Dianping and Meituan -- "two of China's largest forces in the online-to-offline space" -- have formed a strategic partnership to combat Baidu for a larger share of the Chinese O2O market. What really caught my attention was the estimated size of the addressable market and what companies were backing the new partnership. After some thought and initial consternation, I've come to the conclusion that this competition is a good sign that Baidu's aggressive move into O2O is the right one.

The market is massive enough to make enemies into friendsThe Chinese O2O market is estimated to grow to $1.13 trillion by 2017, according to a Bloomberg article. This is a truly staggering figure. Owning even a small portion of this market could lead to material effects on the bottom lines of even the largest multibillion-dollar companies such as Baidu. Li isn't engaging in pie-in-the-sky product design but rather is attacking what may become one of the largest addressable markets in all of business.

The two companies that are backing the Dianping and Meituan alliance are Tencent, a large Chinese holding company, and Alibaba, which is a $170 billion holding company that had its IPO last year. According to Bloomberg Business, these two companies compete on everything from entertainment and e-commerce to banking. Yet they have chosen to work together to tap this market and compete with Baidu.

We're looking at a classic example where the market is large enough for there to be multiple winners in the space. Not every opportunity requires one company to completely vanquish the others, and I think that both Dianping-Meituan and Baidu group-buying site Nuomi will benefit from the growth of the O2O market. I still believe that Baidu will be most successful in the space, as it was its actions that forced this new partnership to develop. Li had the vision to see this opportunity years ago, and I'll bet on him to continue to see around the corners that lie ahead.

Baidu itself is pretty darn confident

Baidu CEO Robin Li. Source: Baidu.

In response to the partnership announcement, Baidu spokesman Kaiser Kuo said in an emailed statement to Bloomberg that, "This merger is an extreme measure that shows just how seriously Meituan and Dianping view the threat from Baidu Nuomi." I couldn't agree more. Any time competitors team up to fight a common opponent, they must fear the strength of their adversary.

The merger is intended to reduce subsidies that were eating away at the margins of both Dianping and Meituan. Kaiser Kuo, also in the statement quoted by Bloomberg, asked a simple but pointed question: "How will this merger end or reduce subsidies? They still need to compete with Baidu."

It's easy to have a gut reaction when big competitors enter a space that one of your companies operates in. It's important to keep in mind that these competitors are usually doing so because your business is performing well, has found a huge market, or both. As a Baidu shareholder, I take it as a great sign that more companies want a piece of the Chinese O2O market. I'm sure Li will fight them tooth and nail, and I look forward to holding Baidu shares for decades to come.